1.1. ADVERTISING BUDGET 1.1.1.
Introduction
Budget is quantitative expression of future plan of activities. It is a future plan of activities expressed in terms of currency/rupees. It is prepared for a fixed period of time. Advertising budget is a financial document that shows the total amount to be spent on advertising and lists the way this amount is to be allocated. It is a translation of advertising plan into money to be spent on advertising. It is an estimation of total amount to be spent on advertising during a given period of time for achieving marketing objectives. It involves allocation of a portion of total marketing resources to advertising functions of a firm. An advertising budget shows how much amount is to be spent on advertising and how this amount will be allocated among different media, sales territories, products, selling-activities, etc. It states the proposed advertising expenditure and serves as a decision-making tool for the management while allocating available funds to the various advertising functions and related activities of the company. Advertising budget and its process is similar with the Sales Promotion budget and Integrated Marketing Communication (IMC) budget. All three terms can be used interchangeably also due to close similarity. Advertising budget is prepared by Advertising Manager in consultation with Marketing Manager of the company. But in small business organizations, which do not have separate advertising department, the responsibility of preparing ad-budget lies on top management or Marketing Manager. According to the Institute of Cost and work Accountant London, “A budget is a financial or quantitative statement prepare prior to a definite period of time; of the policy to be persuade during that period for the purpose of achieving a given objective”.
1.1.2.
Features of Advertising Budget
The features of advertising budget are as follows: 1) Advertising budget is a financial statement expressed in monetary terms, 2) It is for a specific future period. It is prepared prior to the budget period during which it will operate, 3) It is prepared by Advertising Manager. It is approved by top management for its implementation, 4) It shows the plan of allocation of available funds to various advertising activities, 5) It affects the selection of media, selection of advertising agency and selection of message source (model for advertisement), 6) Its size depends on various internal and external factors, and 7) It is a limiting factor which determines the size of advertising campaign.
1.1.3. Advertising Budget as a Concept of Investment Advertising budget is assigned to build the image and reputation of the organization. The achievement of the budget is observed over a long period. Some of the expenditure on advertising attracts customers immediately; they buy the product when they listen to or view the advertising message. This expenditure is known as revenue expenditure. Some expenditure is incurred on building the image and reputation. The effects of advertising are realized gradually over a long period. This expenditure is capital expenditure or investment. The expenditure on advertising is accepted as revenue expenditure by the income-tax authorities. The marketing manager is authorized to control and spend the money assigned to him for advertising purpose. Advertising expenditure is a capital investment when it is incurred to build the image, goodwill and reputation of product and company; and this results in a gradual increase in the sales, although the expenditure is considered as revenue expenditure in the accounting entry. It is an outlay or expenditure made today to achieve benefits in future. This expenditure is known as capital investment although it is assigned under the revenue budget but it is not accepted as a capital budget.
1.1.4. Factors Influencing the Size of the Advertising Budget Following factors affect the size of advertising budget:
Factors Influencing the Size of the Advertising Budget Objectives to be Attained Coverage Expectations Product Class
Stage in the Product-life Cycle
Prevailing Economic Conditions Age of the Company Size of the Company Competitive Activities
Funds Available Approach to Advertising
1) Objectives to be Attained: How much the company is going to spend is determined by the objectives to be
attained. Objectives act as the sheet anchor and the standards for advertising performance. These objectives are – bringing about increase in sales, introduction of new products, supporting sales force, reaching inaccessible consumers, entering a new market, improving dealer relations, expanding industry’s sales, building up goodwill, building a brand preference, counter acting competition, dispelling the likely misunderstandings and so on. It is a particular sales objective or the set of objectives that shapes the advertising budget. 2) Coverage Expectations: Advertising coverage implies the number of persons to be reached. It is the
question of reaching a target audience through different media and media vehicles. The extent of coverage is influenced very much by the nature of the market enjoyed by the products. 3) Product Class: Talking of only consumer goods, these have been classified into three categories, namely,
convenience, shopping and specialty. In case of convenience goods, they require a large advertising expenditure because of their intensive distribution and heavy dependence on mass advertising to sell in advance to the prospects before they shop. On the other hand, the fashion goods require less advertising as the buyers can judge the qualities of these products themselves in person while they hop from shop to shop. Services goods such as automobiles, fridges, washing machines, T.V sets, cooking ranges, kitchen-wares and the like warrant heavy doses of advertising and personal selling efforts. 4) Stage in the Product-life Cycle: Every product has its life-cycle consisting of four phases, namely,
introduction, growth, maturity and decline. When a new product is introduced, it calls for the heaviest doses of advertising, and therefore, the budget gets blown-up. During the growth stage, the funds spend are really substantial. However, when the product reaches the stage of maturity or saturation and the stage of decline, it is the price appeal that works than the advertising strategy. Hence, the advertising spending gets reduced considerably. 5) Prevailing Economic Conditions: The economic activities are not always the same. The economic system
faces brisk and slack phases which are referred to as boom and slump phases of business cycle. During the sour economic conditions, majority of the companies cut back the advertising budget and during the period of boom conditions, they fatter their budgets beyond limits. This has been because, the business community thinks advertising as recurring expenditure than an investment. 6) Age of the Company: A company which is seasoned and is known to the consumers will have certainly an
advantage in introducing a new product or a service. People readily accept the new product in the light of its past dependable performance. On the other hand, a new company that has not introduced itself will sweat in introducing its products. 7) Size of the Company: It goes without saying that a bigger company with vast financial resources within its
easy reach will have definitely liberal advertising budget. Even if it decides to spend, say, only 3 percent of its sales, the advertising funds will be quite substantial and the desired effects or results can be brought about easily. On the other had, for a small company, it would work out almost 24 per cent to 30 per cent of its sales to earmark the amount equal to that of a big company.
8) Funds Available: An absolute limit is put on the advertising budget by what a company can afford irrespective
of its age and size. The advertising manager has really wonderful ideas to increase the sales, profits to the firm and the satisfaction to the consumers. However, they are of no avail as they cannot be realized as funds are not available. Thus, the company has got to be satisfied with less ambitious workable size of the budget as forced by the financial stringency the company conditions put. Finance is a major key factor or principal budget factor that dictates the size of the advertising budget. 9) Competitive Activities: It is the ability to size up the competitor or competitors and their activities than the
ability to spend that pays rich dividends at times. The success of the advertiser rests on the strategic approach and spending. It is possible only when the advertiser knows –How much is his competitor spending? What is the format of his spending? What is his strategy? And so on. Most of the companies use their competitors’ budget pattern as their model for budget purposes. 10) Approach to Advertising: The amount to be spent on advertising is also depending on the way in which it
is looked upon. Traditionally, it has been accepted as the current expenditure like any other selling expenditure, however, now-a-days, the attitude and philosophy has undergone a thorough change and it is more looked upon as an investment than a mere current expenditure because it has long-term cumulative effects on the company efforts and results.
1.1.5.
Process of Advertising Budget
Advertising budget is prepared by advertising manager in consultation with marketing-manager of the company. The advertising budget process involves the following main steps: 1) Setting Advertising Objectives: Before deciding on advertising Setting Advertising Objectives budget, the advertising manager must be clear about advertising objectives. These objectives should be clearly defined in quantitative Determining Tasks to be terms so that amount of advertising budget can be decided for achieving performed to Achieve Advertising Objectives these objectives. Main advertising objectives can be to achieve the desired level of sales, to enhance market share by specific percentage, Preparing Advertising Budget to increase awareness regarding product and its uses, to develop preference for our product and to convince the customers to buy our product. These objectives will help the advertising manager to determine Approval and to allocate the ad budget. Tasks to be Allocation of Advertising Budget Performed to Achieve Advertising Objectives: After identifying advertising-objectives, the next step Monitor and Control is to determine tasks, activities, strategies, functions to be performed Figure 2.11: Process of Advertising Budget to achieve the advertising objectives. These tasks may include; selection of media, selection of advertisingagency, designing of advertisement copy, deciding frequency of advertisement, timing of advertisement, quantum of space to be taken in print media, etc. This requires a good knowledge of various activities of an effective advertising campaign. While determining the activities to be performed the advertiser keeps in mind the activities done last year and activities of competitive concerns.
2) Determining
3) Preparing Advertising Budget: After identifying various activities to be done to achieve advertising
objectives, the next step is to find the cost of all such activities. Total cost of all such activities is the amount required for advertising-budget. To keep the budget flexible, certain amount in the form of provision for contingencies is added to the total cost. 4) Approval: After preparing advertising budget, it is sent to top-management through marketing manager for necessary approval. In large organizations, this proposed ad-budget is evaluated, reviewed and scrutinized by high-powered-budget committee before submitting it to the top-management for final approval. Budget committee will ensure that proposed budget will be effective enough to achieve advertising objectives. It will also ensure that all the required activities to achieve advertising objectives have been covered and the rates/cost of various activities is competitive. After approval by budget committee, it is presented before topmanagement. Top-management will see if the budget is affordable, need based and justified. Top-management can impose ceiling on proposed budget and send it back to budget-committee for necessary review. If it finds the budget justified and within affordable limit, then it will pass the budget.
5) Allocation of Advertising Budget: After the budget is approved by the top management, the next step is to
allocate it. Allocation means dividing the advertisement budget on different products and activities. Advertising budget is allocated on various product-lines, product items, media, sales-territories, advertising research, etc. It involves determining which market, product; promotional element will receive how much of the amount of funds appropriated. Advertising-allocation depends upon company’s policies, competitors strategies, nature of tasks required to achieve advertising objectives, stage of product life-cycle, market size, company’s promotional plans, charges of advertising agency, etc. While allocating the advertising budget to different activities/territories/products, the budget should have flexibility to accommodate sudden changes in the market, competitors’ strategies and change in other components of marketing environment. Budget allocation should not be very rigid. Advertising manager should be authorized to make necessary modifications in allocation of advertising-budget. 6) Monitor and Control: After allocation of advertising budget, it is essential to have an adequate monitoring and
control over it. In control, actual expenditure is compared with planned expenditure. In case actual expenditure is more than planned expenditure, then corrective-actions are taken and responsibilities are fixed to ensure cost control over advertising-budget. Monitoring and control of ad-budget is necessary to make maximum-utilization of funds, to reduce wastage in ad-expenses and to increase efficiency in various advertising activities. Advertisement effectiveness is monitored and evaluated in the light of the budget appropriated.
1.1.6.
Theoretical Approaches to Budget Setting
There are three important issues need to look over before making advertising budget decisions: 1) Economies of Scale: Is there some relevant range in which increments of advertising yield increasing returns? 2) Threshold Effects: Is there some minimum level of exposure that must be exceeded for advertising to have
a discernible effect? 3) Interaction Effects: Does advertising interact with each element of the marketing mix, especially personal
selling, to produce effects that are greater than the sum of their separate effects? The answers to two of these questions can be found in the conceptual framework of the models discussed below. The logical process of arriving at the communication budget is inspired by the marginal analysis rooted in economics, and the relationship of communication expenditure with sales, with the latter taken as a function of the former: 1) Marginal Analysis: As advertising/promotional expenditures increase, sales, and gross margins also increase to a point, but then they level-off. Profits are shown to be a result of the gross margin minus advertising expenditures. Using this theory to establish its budget, a firm would continue to spend advertising/promotional dollars as long as the marginal revenues created by these expenditures exceeded the incremental advertising/promotional costs. As shown on the graph, the optimal expenditure level is the point where marginal costs equal the marginal revenues they generate (point A). If the sum of the advertising/promotional expenditures exceeded the revenues they generated, one would conclude the appropriations were too high and scale down the budget. If revenues were higher, a higher budget might be in order. Figure 2.12 graphically represents the concept of marginal analysis. Sales (`) f(A) = Sales A = Advertising/promotions expenditures Mf(A) = Gross margin
A
Fixed cost of advertising Advertising/ Promotions (`)
P = Mf(A) – A = Profit Figure 2.12: Marginal Analysis
Assumptions of Marginal Analysis While marginal analysis seems logical intuitively, certain weaknesses limit its usefulness. These weaknesses include the assumptions that: i) Sales are a Direct Measure of Advertising and Promotions Efforts: The fact that the advertiser needs to set communications objectives that contribute to accomplishing overall marketing objectives but at the same time they are different. One reason for this strategy is that it is often difficult, if not impossible, to demonstrate the effects of advertising and promotions on sales. Using sales as a direct measure, it has been almost impossible to establish the contribution of advertising and promotion.
According to Frank Bass, “There is no more difficult, complex, or controversial problem in marketing than measuring the influence of advertising on sales”. According to David Aaker and James Carman, “Looking for the relationship between advertising and sales is somewhat worse than looking for a needle in a haystack”. Thus, to try to show that the size of the budget will directly affect sales of the product is misleading. A more logical approach would be to examine the impact of various budgets on the attainment of communications objectives. Sales are not the only goal of the promotional effort. Awareness, interest, attitude change, and other communications objectives are often sought, and while the bottom-line may be to sell the product; these objectives may serve as the basis on which the promotional program is developed. ii) Sales are determined Solely by Advertising and Promotion: This assumption ignores the remaining
elements of the marketing mix – price, product, and distribution – which do contribute to a company’s success. Environmental factors may also affect the promotional program, leading the Marketing Manager to assume the advertising was or was not effective when some other factor may have helped or hindered the accomplishment of the desired objectives. While the economic approach to the budgeting process is a logical one, the difficulties associated with determining the effects of the promotional effort on sales and revenues limit its applicability. Marginal analysis is seldom used as a basis for budgeting (except for direct-response advertising). 2) Sales Response Models: The sales curve in figure 2.12 shows sales leveling-off even though advertising
and promotions efforts continue to increase. The relationship between advertising and sales has been the topic of much research and discussion designed to determine the shape of the response curve. Almost all advertisers subscribe to one of two models of the advertising/sales response function: the concave-downward function or the S-shaped response curve. i) Concave-Downward Function: After reviewing more than 100 studies of the effects of advertising on sales, Julian Simon and Johan Amdt concluded that the effects of advertising budgets follow the microeconomic law of diminishing returns, i.e., as the amount of advertising increases, its incremental value decreases. The logic is that those with the greatest potential to buy will likely act on the first (or earliest) exposures, while those less likely to buy are not likely to change as a result of the advertising. For those who may be potential buyers, each additional ad will supply little or no new information that will affect their decision. Thus, according to the concave-downward function model, the effects of advertising quickly begin to diminish, as shown in figure 2.13 a. Budgeting under this model suggests that fewer advertising dollars may be needed to create the optimal influence on sales.
Incremental sales
Advertising expenditures Figure 2.13 a): Concave-Downward Response Curve
ii) S-Shaped Response Function: Many advertising managers assume the S-shaped response curve (figure
2.13 b), which projects an S-shaped response function to the budget outlay (again measured in sales). Initial outlays of the advertising budget have little impact (as indicated by the essentially flat sales curve in range A). After a certain budget level has been reached, (the beginning of range B), advertising and promotional efforts begin to have an effect, as additional increments of expenditures result in increased sales. This incremental gain continues only to a point. However, because at the beginning of range C additional expenditures begin to return little or nothing in the way of sales. This model suggests a small advertising budget is likely to have no impact beyond the sales that may have been generated through other means (e.g.,
word-of-mouth). At the other extreme, more does not necessarily mean better: Additional dollars spent beyond range B have no additional impact on sales and for the most part can be considered wasted. As with marginal analysis, one would attempt to operate at that point on the curve in area B where the maximum return for the money is attained.
Incremental sales
Range B
Range A
Range C
b) S-Shaped Response Function Figure 2.13: Advertising Sales/Response Functions
Weaknesses in these sales response models render them of limited use to practitioners for direct applications. Many of the problems seen earlier – the use of sales as a dependent variable, measurement problems, and so on – limit the usefulness of these models. At the same time, keep in mind the purpose of discussing such models. Even though marginal analysis and the sales response curves may not apply directly, they give managers some insight into a theoretical basis of how the budgeting process should work. Some empirical evidence indicates the models may have validity.
1.1.7.
Budgeting Methods used for Fixing Ad Budget
The various budgeting methods used for determining the ad budget takes several forms as shown in figure below. These ad budgeting methods are also termed as the types of ad budget. Budgeting Methods for Advertisement
Percentage of Sales Method Competitive Parity Method Objective and Task Method All you can Afford Judgment Method Increase over Last Year’s Budget Return on Investment Method Quantitative Methods Experimental Approach
1.1.7.1.
Percentage of Sales Method
Under this method, the amount to be appropriated for advertising is arrived at by multiplying the value of past year’s sales or projected sales for the budget period with a pre-determined percentage. Advertising Budget Amount = Past Year’s Sales or Anticipated Sales × Pre-determined Percentage The percentage depends upon many factors like nature of product, level of competition, availability of funds, stage of product life cycle, amount spent on advertising by competitors, etc. Some companies like mining
companies, steel-companies appropriate 1% to 2% of sales for advertising budget, while consumer-productcompanies like cosmetic-companies appropriate 30% to 40% of sales for advertising. Here past sales or future sales can be taken as base for determining ad-budget. The past sales may be of immediate previous year or average sale of preceding two or three years. But taking sale of past years may be wrong as previous year’s sales may not be realistic forecast of future sales. Future sales will probably be more than past sales as a result of advertising. Some companies take future sales as a basis for advertising-budget. By doing so, advertising efforts are related to future needs and future conditions. Advertising expenditure should be related to sales volume the advertisement is expected to produce. But it is very difficult to make reliable and accurate estimate of future sales. Another base followed in this method is ‘unit of sales’. Under this method, specific amount of rupees is allocated to the advertising budget for each unit sold. It is also named as fixed-sum-per-unit of product method. It is based on the assumption that a specific amount of advertising is required for marketing each unit. It is useful in the advertisement of specialty goods of high-unit-price. Merits of Percentage of Sales Method 1) Simple: This method is simple, workable and easy to understand. 2) Flexible: The advertising appropriation does not remain fixed. It fluctuates directly with sales. If past or
projected sales are high, the appropriation of advertising will be high. 3) Prevents Advertising Wars: It helps the industry in preventing advertising wars because advertising
expenses are proportionate to market share in sales. Companies with more sales spend more on advertising and companies with fewer sales spend less on advertising. So in this method, advertising budget is decided on the basis of level of sales. 4) Satisfactory: Since this method directly relates advertising expenditure to sales, it seems to be very
satisfactory to many advertisers. Demerits of Percentage of Sales Method Although this method is very popular method of framing advertising budget, it suffers from some weaknesses which are as follows: 1) Illogical: It is illogical method because as per this method, the company with more sales will spend more on advertising and the company with fewer sales will spend less on advertising. But in reality, the need is just opposite to it. A company with fewer sales should spend more on advertising so that it can push up its sales. For example, there are say two similar companies in the same industry. The sale of first company is ` 50 lakhs and sale of other company is ` 40 lakhs. Now as per the need, the second company should spend more than the first company so that it can increase its sales. But as per method of percentage of sale, second company will spend less on advertising. 2) Arbitrary: The percentage on sales is fixed arbitrarily and not scientifically. There is no scientific method
for fixing this percentage. 3) Baseless Results when Sales are Declining: This method gives very dangerous results in a case where
sales are declining. In such a case, as per this method advertising budget would be less whereas in reality, the appropriation to advertising budget should be more to overcome the problem of decreasing sales. For example, if sales of a company are ` 20 lakhs in first year and ` 16 lakhs in second year, then according to this method appropriation to advertising will decrease by same percentage. But in reality, company should spend more on advertising so that it can regain its earlier position and can reverse the trend of declining sales. 4) Considers Advertising Expense as Dependent Variable on Sales: This method considers advertising as
result of sales, i.e., sales affect advertising expenditure. As per this method if sales are high, appropriation of advertising will be high. If sales are low, appropriation to advertising will be low. But the fact is that advertising affects sales. If advertising expenditure is high, it may result in higher sales and if advertising expenditure is decreased it may result in decrease in sales. Hence, this method considers advertising as a
‘result of sales’ whereas the fact is that ‘advertising results in sales’. So considering advertising expense as a dependent variable on sales is wrong. 5) Baseless Results in Introduction Stage of Product-Life-Cycle: This method gives inappropriate results if
the advertiser has introduced a new product in the market. In the introduction stage, sales are very low and if the percentage of sale method is used for appropriating the budget, then company will appropriate very less amount for advertising but a new product needs heavy initial advertising expenditure to generate sales and to be popular. 6) Not Much Useful for Long-Term Advertising Programmes: In this method, sale is the basis for
appropriating advertising budget. But sales vary from year to year and from market to market. So no longterm advertising programme can be prepared. 7) Ignores Other Important Variables/Factors affecting Advertising-Budget: In this method, advertising
budget is decided on the basis of sales only and other important factors affecting the advertising budget are ignored, like-market needs, available opportunities, sudden changes in marketing environment, level of competition, stage in product life-cycle, etc. Despite the above weaknesses and criticism, this method is very popular and is widely used.
1.1.7.2.
Competitive Parity Method
It is a traditional approach in which advertising budget is framed in such a way that our company is at par with competitors in spending money on advertising. Here advertising is taken as a defensive tool and not as offensive tool to achieve marketing-objectives. Under this approach, advertisers spend as much as their competitors spend so that their company is not at any disadvantage. It involves collection of relevant data about competitors advertising appropriation. This method is based on the assumption that the company in question knows what competitors are doing and what competitors are planning to do. It is also assumed that competitors have similar marketing problems and environment. It assumes that the promotion needs of the organization are the same as that of competitive concerns or rivals. It also assumes that competitors have framed their advertisement budgets correctly and rationally. Competitive parity budgets can be determined in several ways. These are as follows: 1) Spend the same rupee amount on advertising as major competitor does; 2) Spend the same percentage of sales on advertising as major competitor does; 3) Spend the same percentage of sales on advertising as the average of entire industry. All of these alternatives have one feature in common, i.e., the actions of competitors largely affect the company’s advertising budget. Merits of Competitive Parity Method 1) Considers Level of Competition: This method is most appropriate where competition is very rigorous. Under such circumstances, management has to consider the advertising appropriations of competitors to keep itself in line with its competitors. 2) Check on Excessive or Meagre Budget: Comparison of advertising budget with that of rival companies
puts a check on excessive advertisement budget. Similarly the companies which are spending very less on advertising in comparison to their rival companies become alert about their meagre ad-budget. Thus, comparison with other rivals makes the company alert of its excessive or meagre spending on advertising. 3) Logical: The purpose of advertising is to save its market share from competitors and to increase its sales. So it is
logical to decide advertisement budget on the basis of budgets of competitive concerns. If we spend very less on advertising than our competitors, then our market share may decline. Demerits of Competitive Parity Method 1) Wrong Assumption: This method is based on the assumption that competitors are always right and rational in making their ad-budget. But in reality, competitors might have made their ad-budgets in a haphazard manner.
2) Non-Availability of Information: The Company using this approach needs information about rival’s-
advertising-budgets. But it is not an easy task to collect information about competitor’s ad-budget. The management can only makes guess about rival’s ad-budget. The advertiser tries to get information about his competitor’s advertisement budget by indirect sources, from their employees, spying, etc., but such information may not always be reliable. 3) Different Promotion Needs: This method is based on wrong basic assumption that all firms in an industry
have same opportunities for advertising and same promotional needs. But the promotional needs are never same, e.g., when a company launches a new product, it will have to compete with competitors’ already well established brands. The promotion-needs of these two brands are totally different. The new product will require heavier promotional efforts to create awareness among masses as compared to promotional needs of already well established brand. 4) Ignores other Variables affecting Ad Budget: This method considers only the advertising appropriation
of rival companies. This method ignores the other important factors affecting advertising budget. The other important variables can be affordability, sales-level needs, functions, tasks required to be performed by the advertiser to achieve ad-objectives, etc.
1.1.7.3.
Objective and Task Method
The most desirable method of setting the advertising budget is objective and task method. It is a goal-oriented method of appropriating the budget. It is based on setting advertising objectives and identifying the tasks to be performed to achieve these objectives. First of all, advertising objectives are determined. Then different tasks to be performed to achieve these objectives are identified. After that, cost of all these tasks is estimated and total cost of all these tasks plus some amount for contingencies constitute advertising budget. This approach considers advertising as an investment and a means to achieve long-term business objective. Krick Patrick has defined ‘objective and task approach’ as “listing the advertising objectives and identifying the tasks to be done to achieve these objects.” Objectives of advertising are long-term in nature. Tasks are shortterm functions to be done to achieve these objectives. Tasks are like short-term goals. Merits of Objective and Task Method 1) More Suitable in Case of New Products: In case of new product, there is no previous data on sales and no previous budget. So this method is more suitable for new products as it is based on zero base budgeting, i.e., it needs no previous records, information, etc. So for preparing advertising budget in case of new products, this method is more appropriate than other methods. 2) Goal Oriented: This budget gives due consideration to advertising objectives. In this method, all activities
and tasks are enlisted to achieve advertising objectives. Hence this method is goal oriented. 3) Co-Ordination among Different Advertising Activities: In this method all advertising activities and tasks
are decided in advance, so better co-ordination can be maintained among various advertising activities and tasks. 4) Logical: This method is more logical. In this method advertising amount is not decided arbitrarily.
According to this method, the advertiser decides advertising budget as per the needs rather than linking budget with competitor’s budget or past sales. It is a need based budget. In this regard, it is better than competitive parity method, where competitor’s actions are followed blindly. 5) Suitable for Planning in the Long-Run: This method is based on both short term and long term
advertising objectives. This method is more suitable for long term planning. So in this regard, it is better than affordable method, competitive parity method which considers only short term factors. Demerits of Objective and Task Method This method has some weaknesses, which are as follows: 1) Ill-Defined Objectives: If the objectives of advertising are not defined correctly, the whole budget will go wrong as objectives are the basis of this budget.
2) Difficult to Determine Specific Tasks: It is difficult to translate objectives into specific tasks. Determining
tasks requires adequate research, experience, knowledge, awareness, etc. So different tasks cannot be specifically defined. 3) Ignores Affordability: This method considers the cost of various tasks as the basis of budget. But it is
quite possible that cost may not be within affordable limit of organization. 4) Ignores Competitor’s Budget: This method does not give due consideration to competitor’s budget. While
in practice, if the level of competition is very high, then competitor’s budget cannot be ignored while framing our advertising budget. On the whole, objective and task method is more rational, realistic and need based as compared to other methods.
1.1.7.4.
All you can Afford
Here the advertising budget is established as a predetermined share of profits or financial resources. The availability of current revenues sets the upper limit of the ad budget. The only advantage to this approach is that it sets reasonable limits on the expenditures for advertising. However, from the standpoint of sound marketing practice, this method is undesirable because there is no necessary connection between liquidity and advertising opportunity. Any firm that limits its advertising outlays to the amount of available funds will probably miss opportunities for increasing sales and profits.
1.1.7.5.
Judgment Method
In this method, advertising budget is decided by the experienced managers of the company on the basis of their judgment. Here advertising budget is based on arbitrary thinking of some experienced managers and not based on scientific lines. Over the years, some managers gain experience and this enables them to arrive at appropriate figure for advertising budget by using their judgment. They decide the advertising budget at a lump sum figure considering all relevant factors like objectives of advertising, actions and reactions of competitors, nature of customers, level of sales, availability of funds, cost of various media, stage in product life cycle, etc. This method involves no clerical or statistical work. It is based on the experience and judgment of experienced managers. So it is also named as arbitrary method.
1.1.7.6.
Increase over Last Year’s Budget
This method involves an increase in preceding year’s expenditure by a certain percentage to enable a firm to consider increase in advertising cost and to provide for planned growth in sales. Increase in price level of advertising inputs leads to increase in advertising cost. Company may also expect increase in sales, and for increased sales, more advertising expenditure will be required. So the company should increase its advertising budget over past year’s budget. This is a very simple method. But it has certain limitations: 1) Ignores Change in Marketing Environment and Objectives of Advertising: This method simply ignores the needs and objectives of advertising. There may be change in marketing environment in comparison to last year like entry of new competitors, change in government policy, etc. So changed environment may necessitate preparation of entirely new budget. 2) Repetition of Last Year’s Mistakes: This method simply adds a certain percentage to last year budget.
Hence, the errors, mistakes and weaknesses of last year’s budget are carried forward. 3) Not Possible for New Product or in Case of New Company: This method cannot be used when a
company launches new product or in case of a new company that has come into existence just in this year.
1.1.7.7.
Return on Investment Method
Return on investment method is entirely different from other methods. This method considers advertising expenditure as an investment and not as routine revenue expenditure. Like other investments of the company, advertising is also expected to give certain return. Advertising builds up an intangible asset that is brand-equity. Brand equity refers to brand popularity and brand preference. This asset has market value and can be sold at any stage. The return that the company gets from advertising is generally spread over a period of time. Advertising expenditure in one year generates sales for years and thus returns on this investment flows in for many years. Advertising results in increased profits generated by increase in sales
and goodwill. This method considers long run effects of advertising. Capital budgeting techniques like net present value, discounted cash flow, pay-back-method, etc., are used to appropriate the amount of advertising budget. According to this method company spends on advertising till return on investment is more than the normal rate of return. This method correlates sales and profits with advertising expenditure. It is based on very logical considerations but in practice it is very difficult to assess the returns from advertising. Because of its complexity it is not used in real life.
1.1.7.8.
Quantitative Methods (Statistical Methods)
Statistical techniques like multiple regression, probability, simulation or programming techniques, etc., are used to prepare advertising budget. Multiple regressions help to determine the effect of various factors on the size of advertising budget, i.e., it measures the cumulative effect of all the factors affecting advertising budget. Using simulation, inter-relationship among various advertising activities and their effect on advertising budget is measured. Probability is used to estimate the chances that a consumer will purchase the product if he is exposed to an ad copy. With the development of computers use of quantitative methods has increased. These methods assist the advertiser in deciding ad budget along with other methods of advertising. Use of these methods is very tedious and only experts can make use of these methods.
1.1.7.9.
Experimental Approach
Experimental approach is used as an alternative to the statistical approaches and mathematical models. The promotion or brand manager uses tests and experiments in one or more selected market areas. The purpose is to determine the impact of input variations that might be used. The feedback data from these experiments and tests is used in determining the advertising budget. A brand may be simultaneously tested in several market areas with similar population, level of brand usage and brand share. Different advertising expenditure levels are kept for each market. Brand awareness and sales levels are measured before, during and after the test in each market. Results are compared and estimates can be developed on how budget variations might influence advertising results nationwide. The managers may decide any level of budget depending on the firm’s advertising objectives. Apparently, the experimental approach removes the difficulties faced by other budgeting methods.
